Can GameStop Keep Surging This Week?

GameStop (NYSE: GME) will announce earnings results for the second quarter on Thursday, Aug. 22. And with the stock sitting near a five-year high, a lot is riding on this week's report. Here's what you need to watch for in the release.

Weak expectationsYou wouldn't guess it by looking at its recent stock returns, but Wall Street has very low expectations for the video-game retailer. Analysts are calling for earnings of just $0.04 a share, versus the $0.16 the company booked a year ago. Revenue is expected to shrink by 13%, to $1.35 billion.

GameStop predicted back in May that comparable sales would fall hard this quarter -- by as much as 16% -- as it continues to plod through the late stages of the console cycle. That plunge would keep up a depressing streak that goes back for eight quarters.

Quarter

Comparable Sales

Q2 2011

(9.1%)

Q3 2011

(0.6%)

Q4 2011

(3.6%)

Q1 2012

(12.5%)

Q2 2012

(9.3%)

Q3 2012

(8.9%)

Q4 2012

(4.6%)

Q1 2013

(6.7%)

Source: GameStop financial filings.

Still, GameStop has a history of beating low earnings expectations. One simple reason is the retailer has been plowing excess cash into share repurchases. Last quarter it bought 1 million of its own shares, driving its outstanding share count down to 118 million, well below the 134 million it reported at the start of 2012. It gets easier to beat per-share earnings expectations when you're busy shrinking your total share count.

New businessBut GameStop's story isn't just about managed decline. The company is making progress in a couple of new business areas even while its traditional business shrinks. Its mobile revenue grew by almost 300% last quarter, as GameStop expanded a program to accept trade-ins for smartphones and tablets and resell those devices as pre-owned merchandise. Digital sales are up, too, by 47% last quarter. The contribution from these two businesses helped GameStop actually increase profitability this year. Gross profit margin grew by one percentage point to 31% last quarter.

New gamesFinally, a few major new game releases could power a boost in GameStop's outlook for the coming quarter. Disney (NYSE: DIS) just launched its Infinity title, which it plans to promote heavily this fall. Infinity is going up against Activision Blizzard (NASDAQ: ATVI) and the Skylanders franchise that has been worth $1.5 billion in sales so far. Sure, Activision created this gaming genre and has an almost two-year head start here. But Disney's rival product has attracted strong initial reviews and boasts a deep catalog of characters that are already popular with children. Still, no matter who wins this battle, GameStop should see a sales boost from the fight.

Then September will bring Take-Two's highly anticipated release of Grand Theft Auto V, which should attract an entirely different demographic into GameStop's stores. Take-Two said last quarter that it expects GTA to help the company log "one of our best years ever," and that would be welcome news for GameStop as it waits for next-generation gaming consoles to begin selling this holiday season.

Tired of watching your stocks creep up year after year at a glacial pace? Motley Fool co-founder David Gardner, founder of the world's No. 1 growth-stock newsletter, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, with you! It's a special 100% free report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains, and click here for instant access to a whole new game plan of stock picks to help power your portfolio.

Fool contributor Demitrios Kalogeropoulos owns shares of Walt Disney and Activision Blizzard. The Motley Fool recommends Activision Blizzard, Take-Two Interactive , and Walt Disney and owns shares of Activision Blizzard, GameStop, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.